Nasdaq hammered; Dow climbs

Greenspan: dramatic slowdown; fiber-optics plunge

By

JulieRannazzisi

NEW YORK (CBS.MW) - A climb in cyclical and drug stocks propelled the Dow Industrials Thursday while the Nasdaq crumbled under the weight of a sell-off in fiber-optic stocks following a more cautious outlook from Corning.

In the meantime, Alan Greenspan made bold remarks in a speech before the Senate Budget Committee. The Fed chief said economic growth has slowed dramatically, adding that the U.S. is now close to zero growth. He also commented favorably on President Bush's proposed tax cuts.

"Greenspan told us that he'll cut rates because the economy is flat and that he supports the proposed tax cuts. And, most importantly, I've never heard him so explicitly rave about secular productivity growth," said Joe Liro, equity strategist at Stone & McCarthy Research Associates.

The tech sector, Liro said, advanced significantly in a very short period of time and thus didn't get mileage from Greenspan's friendly remarks. But, he added, the bullish implications are indisputable over the long haul.

The tech sector relegated to the backburner its willingness to discount the current negative earnings picture in favor of an expected pickup in the second half of 2001, according to Barry Hyman, Weatherly Securities' chief strategist.

Vigorous rotation from sector to sector continued unabated Thursday with investors focusing on paper, chemical, consumer, oil, oil service, retail, drug and utility issues while shunning the biotech and financial sectors. In technology, all sectors slid, with networking and Internet stocks pacing the decline.

Pushing the Dow to the upside were gains in Merck, United Technologies, International Paper, Alcoa, Caterpillar and Boeing.

On the earnings front, SBC Communications
SBC, -0.79%
reported a fourth-quarter profit from operations of 57 cents, in line with the First Call estimate. The stock ended flat at $47.38. See full story.

Volume came in at 1.25 billion on the NYSE and at 2.28 billion on the Nasdaq Stock Market. Market breadth was mixed, with winners outnumbering losers by 16 to 12 on the NYSE and decliners outpacing advancers by 22 to 16 on the Nasdaq.

A peek into Greenspan's speech

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said Greenspan's mention of growth being very close to zero suggests he's not opposed to a 50-basis-point ease next week.

The fed fund futures market is currently pricing in an over 80-percent chance for a rate cut of 50 basis points.

Greenspan reiterated his view that it's better the budget surpluses be lowered by tax reductions than by spending increases. Further, the top central banker said that if current economic weakness spreads beyond what now appears likely, having a tax cut in place may do noticeable good. Read the full story.

The Fed chief said the long-term growth potential of the economy may be so strong that sufficient resources will be available to undertake both debt reduction and surplus-lowering policy initiatives.

"Greenspan made it clear that he would prefer to see tax cuts sooner rather than later given the weakness in the economy and the risk that growing budget surpluses will inherently lead to an unwanted accumulation of private assets," commented Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co.

"From the point of view of George Bush, this is about as good as he could possibly have hoped for -- a positive endorsement from a Fed Chairman whose views on the tax subject have not always been entirely clear," Shepherdson said.

"It sweeps away one powerful line of attack against tax cuts in Congress, and it makes us even more convinced that a package worth up to $1 trillion will be passed before summer," the economist added.

Sector moves

Fiber-optic companies saw their shares depreciate as worries over a slowdown enveloped the sector.

Corning
GLW, -0.24%
fell $13.88, or 19.8 percent, to $56.25. The company posted after the close Wednesday a profit of 34 cents a share, handily beating the First Call/Thomson Financial estimate of 30 cents a share. But the fiber-optic outfit said Corning expects to earn 28 to 31 cents a share in the first quarter compared to previous expectations of EPS of 29 to 30 cents. The company was downgraded by Merrill Lynch and Salomon Smith Barney to reflect uncertainty in the first quarter and less upside in the stock going forward. See full story.

SDL
SDLI
meanwhile, checked in with a fourth-quarter profit of 53 cents a share late Wednesday, surpassing the First Call estimate of 49 cents a share. The stock lost 14.2 percent to $199.19. And JDS Uniphase
JDSU
which is merging with SDL, fell 12.5 percent. The company was downgraded by Salomon Smith Barney and reported late Thursday a profit of 21 cents in its second quarter, two cents ahead of the First Call estimate. JDS Uniphase expects sales in the March quarter to be 7 to 10 percent above sales for the previous quarter to reflect uncertain carrier capital spending prospects, customer inventory adjustments, and a somewhat lower level of near-term sales visibility compared to recent periods. See full story and read After Hours for post-market trading activity.

Separately, JDS and SDL told investors they now expect to complete their merger in February because of the time required to complete the regulatory approval process.

In the Internet arena, web-hosting outfit Exodus Communications
EXDS
registered late Wednesday a fourth-quarter loss of 13 cents a share, three cents less than expectations. But the company warned that it expects a first quarter loss of 26 to 27 cents a share, much wider than the First Call estimate of a loss of 17 cents a share. The slowdown in business from Net companies will cause the larger loss, Exodus said. Ratings on the stock were lowered by Dain Rauscher, ING Barings and CIBC World Markets. Shares slumped 12.2 percent and pulled down Merrill Lynch's Internet Holdrs
HHH, +1.77%
by 6 percent. See full story and read Net Stocks. Among other stocks in the Net group, Amazon fell 13.1 percent and Yahoo slumped 8.6 percent after witnessing nifty gains on Wednesday.

Akamai
AKAM, -0.76%
fumbled by 16.3 percent even after posting late Wednesday a fourth-quarter loss of 61 cents a share, less than the 68-cent loss expected. And Kana
KANA
tumbled 28.5 percent, registering after the close Wednesday a loss from operations of 37 cents, wider than the 20-cent loss expected by First Call. Akamai was upped by Merrill while Kana was downgraded by a slew of brokerages, including J.P. Morgan H&Q, Goldman Sachs and CS First Boston.

In the broad market, drug stocks climbed after two sessions of sloppy action, with a number of companies in the group checking with results Thursday. Eli Lilly
LLY, +1.22%
up 31 cents to $83.06, posted as-expected fourth-quarter earnings of 70 cents a share. Going forward, the company sees EPS of 71 to 73 cents in the first quarter, which compares to the current Wall Street estimate of 73 cents. American Home Products
AHP, -0.99%
up 5.3 percent to $57.64, reported a fourth-quarter profit from operations of 53 cents a share, in line with the First Call estimate. Finally, Schering-Plough
SGP, -0.14%
made 39 cents a share in its fourth quarter, matching the Wall Street estimate, and saw its shares gain 3.2 percent to $53.63. See story.

Biotech issues were one of the sore spots in the broad market, with the Amex Biotech Index
$BTK
off 1.7 percent. Immunex Corp.
IMNX
fell 3.3 percent even after reporting late Wednesday a profit of 9 cents a share in its fourth quarter, a penny ahead of expectations. Prudential Securities said that despite a solid fourth quarter, it expects shares to trade down in the near term due to the company's lowered guidance for 2001 Enbrel sales. A standout on the plus side in the biotech group was Amgen
AMGN, -0.03%
up 4.3 percent, after checking in late Wednesday with a 24-cent profit, a penny shy of Wall Street's estimate. The company reaffirmed EPS growth projections in the mid teens for 2001.

Utility stocks flexed their muscles with smashing gains in California's two troubled utilities: Edison International
EIX, +1.60%
up 35.3 percent, and PG&E Corp.
PCG, +1.10%
up 30.8 percent. Merrill Lynch was the catalyst behind the buying, raising ratings on both companies to a "near-term accumulate" from a "near-term neutral." Merrill said it believes the chances of constructive legislation passing to stabilize the power market and aid the utilities has gone up significantly and the that the risk of bankruptcy - which is still real - has dropped accordingly. See full story. The Philly Utilities Index
UTY, +0.70%
which contained both stocks, advanced 2.0 percent.

Treasury activity

Government issues moved sharply higher in extremely volatile price action.

On the economic font, the employment cost index - the broadest measure of wage and benefit costs - rose just 0.8 percent in the fourth quarter, less than the expected 1.1 increase. Wages and salaries rose 0.7 percent in the fourth quarter while benefits climbed 0.8 percent. See full story.

"While recognizing that the importance of this inflation indicator has diminished significantly since the Fed switched its focus from the threat of inflation to the threat of excessive weakness, it's nonetheless good news for the financial markets," said David Orr, First Union's chief economist, in a note to clients.

The ECI, Orr continued, will lessen arguments that the hawks on the Federal Open Market Committee meeting may have about residual inflation pressures being a reason to proceed cautiously with rate cuts.

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